Some Functiontal Aspects of Bankruptcy
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YALE LAw JOURNAL VOL. XLI JANUARY, 1932 No. 3 SOME FUNCTIONTAL ASPECTS OF BAANKRUPTCY WILLIAM11 0. DOUGLAS * THE case studies of the fifteen hundred New Jersey and Boston banl-upts which were made during the last two years' throw *Visiting Professor of Law, Yale School of Law; co-author of Cases on the Law of Management of Business Units (1931), Cases and Materials on the Law of Financing of Business Units (1931) and Cases and Materials on Corporate Reorganization (1931). ' The author wishes to express his indebtedness to Dr. Dorothy S. Thomas and Miss Emma Corstvet for many helpful suggestions and criticisms re- garding the analysis of cases and presentation of data in this article. I The study in New Jersey, made from November, 1929-June, 19'0, cov- ered 597 of the 1275 petitions filed during the fiscal year ended June 00, 1930. The cases studied were taken from all parts of the District of New Jersey-rural as well as urban, small towns as well as larger cities and included approximately two-thirds of all those who filed their peti- tions during the period of the study. The study in Massachusetts in- cluded 910 of the 2900 (unofficial) petitions filed in the entire District of Massachusetts for the fiscal year ended June 30, 1931. No attempt was made to cover the entire state. Only cases arising in the metropolitan area of Boston, ie., the counties of Suffolk, Norfolk, and Middlesex, were covered. About 70% of all those cases between October, 1930, and June, 1931, were taken. The study in New Jersey was carried on with the generous supervision and collaboration of Hon. William Clark of the United States District Court for the District of New Jersey. The Boston study was made pos- sible only because of genuine and whole-hearted cooperation on the part of the three distinguished Boston referees--Hon. Arthur Black, Hon. B. Loring Young, and Hon. Charles C. Cabot. Both the New Jersey and Boston projects were conducted jointly by the Department of Commerce, the Yale Law School, and the Institute of Human Relations of Yale University. Dr. W. C. Plummer of the Wharton School of Commerce represented the Department of Commerce in the New Jersey study; Mr. Victor Sadd in the Boston study. A report on the New Jersey study has been made by Dr. Plummer. See Causes of Business Failures and Bankruptcies of Individuals in New Jersey in 1929-1930, DOMESTic ColAMuacE SERiES No. 54, Publication of the Department of Commerce (Gov. Print. Off. 1931). For similar publications by the Department of Commerce see Credit Extension and Cavses of FailureAmong Philadclphia Grocers, TRADE INF. BuLL. No. 700 (Gov. Print. Off. 1930); Crcdit Excn- sions and Business Failures, TRADE INF. BuLL. No. 627 (Gov. Print. Off. 1929). Not all of the cases reported by Dr. Plummer are embraced in this report, and vice versa. Due to the presence of two field staffs cases were [329] YALk LAW JOURNAL [Vol. 41 some- light upon the functions which the venerable institution of bankruptcy is performing. The present Act was passed in 18982 and, though amended several times, has never been changed fundamentally. During the thirty-three years it has been in force no inventory of its operation has been made. But little attempt has been made to determine its incidences.4 In fact without independent investigations that would be practically impossible, as no provision is made in the system for the col- lection of vita statistics of bankruptcy. The only data available are those contained in the annual reports of the attorney-general. They are practically valueless for even an administrative, let alone a functional, study of bankruptcy., They reveal little of occasionally covered separately. In addition the report of Dr. Plummer covers 42 cases administered by the Friendly Adjustment Bureau of the North New Jersey Credit Men's Association. For reports on the methods of investigation see Clark, Douglas and Thomas, Th Business Failures Project-I. A Problem in Methodology (1930) 39 YALn L. J. 1013; Douglas and Thomas, The Business Failures Project.-Il. An Analysis of Methods of Investigation (1931) 40 YAIL L. J. 1034. 2 30 STAT. 544 (1898), 11 U. S. C. § 1 (1926). a32 STAT. 797 (1903); 34 STAT. 267 (1906); 36 STAT. 838 (1910); 39 STAT. 999 (1917); 42 STAT. 354 (1922); 44 STAT. 662 (1926). 4 N~teworthy exceptions are the studies made and presently being made by the Department of Remedial Loans of the Russell Sage Foundation as to the relation between bankruptcy and consumer credit under the able direction of Messrs. Leon Henderson and Rolf Nugent; and a cooperative study of bankruptcy by the University of Chicago and the Department of Commerce along the lines of the New Jersey and Boston studies. The Chicago study is being directed by Professor John H. Cover for the University of Chicago and Mr. Victor Sadd for the Department of Com- merce. 5 All that the annual reports of the attorney-general contain are the following: (1) The number of voluntary and involuntary petitions pending, filed and concluded during the fiscal year. (2) The nature of the business of the bankrupts. There aro six head- ings-farmers, wage earners, merchants, manufacturers, professional and others. Not only are these vocational groupings too broad and general but further the group of "others" includes on the average about one-sixth of the total. For any sociological or economic purpose these data would be so vague and general as to be of little utility. (3) Liabilities, divided into unsecured claims on one hand and prior or secured claims on the other. (4) Amounts realized on the assets, with separate designation of the amounts disbursed in conducting the business. (5) Net assets distributed (a) as fees and expenses of administration and (b) to creditors. (6) An analysis of fees and expenses of administration showing in general to what officers they were paid. (7) Appraised value of exemptions and of property securing debts. (8) Number of no-asset cases and total fees and expenses of referees in connection therewith. (9) Number of cases filed in forma pauperis. 19321 ASPECTS OF BANKRUPTCY the kinds of persons using bankruptcy. No clues are given as to why they are there. No information is set forth showing what treatment they obtain-whether they applied for a discharge, whether the application was contested, whether the discharged was granted or refused and if refused on what ground. Nothing is given showing how the various subdivisions of the discharge section [§ 14 (b)] are working. The deficiencies are as apparent on the administrative side of bankruptcy, not only as respects § 14 but also as respects all other sections of the Act. Bankruptcy of course has been the subject of much discussion and investigation during the last generation.( But most of the energy has been directed (but by no means misdirected) to- wards detecting fraudulent practices on the part of bankrupts and lawyers, improving and expediting administration, devis- ing methods of reducing expenses and increasing returns to creditors, eliminating the duplication of functions by various officials, providing more effective creditor control, etc. In other words, the efforts have been directed largely towards oiling and greasing the existing machinery without seriously considering the totally different (though perhaps not more important) engi- neering problem of the social need, use, and function of the par- ticular machinery or its parts. Of course such latter study would be as broad as the life which bankruptcy touches or affects. Its ramifications through the social and economic order would be almost endless. It might suggest basic statutory and administrative changes in the system. Or it might reveal any number of maladjustments of individuals to society and suggest a method of attack along educational, medical, or social lines as corrective measures. Again it might show the incidence of some particular statute, and furnish data for an intelligent revision of it, e. g., of a statute permitting as- signment of wages, which forces wage earners hard pressed by rapacious creditors to seek bankruptcy as a way out. Or it might reveal that in respect to certain failures bankruptcy was acting (10) Separately are given number of indictments and convictions for the nation as a whole. In the study by the Department of Justice now being brought to a close it was found necessary to send to referees throughout the country long and detailed questionnaires in order to obtain adequate and reliable statis- tical information respecting the administrative features of the bankruptcy system. 6 Most significant are the Donovan investigation, conducted for the most part in New York from 1929-1930, and the study carried on by the Department of Justice during the last two years under the direction of Hon. Thomas D. Thacher with the assistance of ir. Lloyd K. Garrison. The Donovan report is to be found in AmDINISTnATIOx OF B,1Rupr' Es- TATES-House Committee Print, 71st Congress, 3d Session (Wash. 1931). The final report on the study by the Department of Justice has not yet been made public. See 16 A. B. A. J. 641 (1930). YALE LAW JOURNAL [Vol. 41 as a corrective to other pathological conditions, e.g., those exist- ing in the small loan field, where, in absence of effective legisla- tion, the necessitous borrower is at the mercy of loan sharks who exact such a toll that bankruptcy is the only avenue of escape." The cases studied in New Jersey and Boston cover as wide a range as the examples given. But for the purposes of this essay a selection of topics has been made from among those relating to the constitution and administration of the Bankruptcy Act itself.